The Seattle Times editorial board argues that “Congress should enact consistent sales-tax laws to even playing field for Main Street businesses,” and I suppose that seems like a fair and reasonable enough objective. But do they understand that there’s no practical way of achieving this goal without putting tens of thousands of small entrepreneurs out of business, including many here in Washington state?
I know this because I started and ran a small software development and publishing company myself for about a half decade during the nineties, which at its peak consisted of me, my (not yet ex) wife, and a single employee. And had we had the burden of collecting and remitting sales taxes to forty-some states, we never could have afforded to stay in business.
The bulk of our sales during those years, maybe 70% of our unit volume, went through a handful of major mail order catalogs, and thus the bulk of our wholesale product shipped tax-free to the Airborne facility in Wilmington, OH. No problem for us there, and I don’t have much sympathy for big catalogs and online retailers who oppose efforts to collect taxes on interstate sales.
But the bulk of our profits came from direct sales, an outlet that would have been all but impossible to administer had we been required to collect taxes for every state and municipality in which we did business.
The mail order catalogs “purchased” our main product, a rhyming dictionary for Mac and Windows, at half the $49.95 MSRP, and generally resold it at the discounted price of $32.00. ($3.00 overnight shipping was pretty much standard at the time.) But I put “purchased” in quotes because that’s not really how the scam worked. Rather, we swapped product for co-op advertising, the price of a fraction of a page costing us thousands of dollars a month, per catalog, by the time we gave up.
If they sold enough product to pay for the ad, as they did every Christmas season, the catalog would purchase more, and we would make money. If they didn’t sell enough product to pay for the ad, as happened most Summer months, we would owe them money. The catch: they wouldn’t sell us Christmas if we didn’t advertise during the Summer.
We sold a lot of product over the years this way. But we really didn’t make much money.
Direct sales, on the other hand, that was mostly profit. At a $39.95 “discounted” direct price, plus about $4.50 shipping and handling for Priority Mail, we could realize 85% gross margins, and the credit card transactions went directly into the bank (as opposed to say, Multiple Zones, whose refusal to pay one Christmas season ultimately drove us out of business). It was a lot of busy work handling the direct sales, and they rarely amounted to more than a few a day, but I enjoyed dealing directly with customers, and the steady trickle of cash flow they created.
In our best sales year we grossed maybe a few hundred thousand dollars, but the cost of advertising was so high that we barely broke even on the 90% of units that went through retail. But the $20,000 to $30,000 a year in direct sales… that, plus a little contract work on the side, was often the difference between paying our bills and going deeper into debt.
And here’s where the Times’ sales tax proposal really strikes home, for had we been required to collect and remit sales tax for every sales tax state—and on any given year we shipped at least a few units each to every one of them—we never could have afforded to sell direct at all.
For example, for several years we displayed at the August MacWorld Expo in Boston, and sold product on the floor as a means of defraying some of the expense, and as such were responsible for paying Massachusetts sales tax on that few days of business. A hassle, but fair enough.
When we stopped exhibiting at MacWorld, and thus stopped filing taxes annually in Massachusetts, their Department of Revenue noticed, sent us a bill for a big late filing fee, and suddenly insisted that we file quarterly. For over two years I had to sporadically deal with Massachusetts’ demands, as late fees and interest accumulated, and threats escalated. I’m not really sure why they eventually dropped their collection efforts, but it probably would have just made sense to pay them the money I didn’t owe, rather than expending so much time and energy fighting it.
Now multiply that by forty-some, and you get an idea of what small businesses might face if sales tax could be charged on interstate sales.
Even the so-called Streamlined Sales Tax Project isn’t nearly streamlined enough for truly small businesses—and I’m not talking about the 100-person companies the Times thinks of as small, but rather mom & pop businesses like my own—if it requires multiple rates and remitting to multiple states. We never had the luxury of affording an accountant, and we certainly couldn’t have afforded one if the Times’ favored proposal had been law. In fact, with the accounting nightmare it would have created, we couldn’t have afforded to stay in business at all.
And thanks to the Internet and services like Ebay, the number of small time entrepreneurs making all or part of their living via direct, interstate sales has exploded over the past decade, taking advantage of an extraordinary online marketplace that would simply be impossible if every vendor had to take the time and/or expense to file taxes in every state that levies a sales tax. I have no gripe with the goal of protecting brick and mortar businesses from the unfair advantage enjoyed by the major online and mail order retailers, but not if tens of thousands of small entrepreneurs are flattened in the process, many of whom are just supplementing their income with a few hundred dollars worth of sales a month.
I’ve had this conversation with state legislators eager to stem the loss of tax revenue to interstate sales, and they’ve mostly brushed aside my concerns, telling me that third-party service providers will magically arise to fill the gap and process the sales tax for me… but at what cost? 5%…? 15%…? 20%…? And at what minimum transaction fee? At some point, and particularly on low cost items, selling direct ceases to be worth the effort.
Indeed, the whole Streamlined Sales Tax Project shows an utter lack of imagination on the part of legislators, and a total lack of appreciation for the role of really small businesses in our economy. For the bigger problem, at least here in Washington state, isn’t the loophole that allows interstate sales to go tax free, but rather our over-reliance on the sales tax itself. That the Times and our legislators would prefer to crush a vibrant economy of small, online retailers rather than address the real revenue problem, shows just how unready they are to lead our state into the 21st Century.